Why your credit report affects the cost of borrowing

Holly Thomas / 20 April 2015 ( 01 November 2016 )

Did you know that you are only likely to get access to the best interest rates if you have a good credit report? Holly Thomas explains how your credit report affects the cost of borrowing and what you can do to improve it.

Credit reference agencies keep information on more than 30 million people in the UK. 

This includes details of certain bill payments and credit arrangements, from mortgages to mobile phones, loans and credit cards, with the repayment history.

It is these credit reports that are used by banks and building societies and any other kinds of lender to help make a decision about whether or not you are an ideal candidate for them to lend money to.

Get our no obligation, free trial to check your credit report now*

How does it affect borrowing?

Lenders  use a variety of different information to give you a credit score, which helps them to determine whether they will lend to you and at what interest rate.

Those who have borrowed money in the past and showed they can make repayments on time have more chance of making a successful application.

If your report is less than squeaky clean, it could cost you. Banks have been stung badly in the past by being too free in approving loan applications and losing money through bad debts – particularly mortgages.

That’s why they have tightened their lending criteria to reduce their number of high-risk borrowers. Only the owners of the cleanest credit files are now granted the best deals.

Top five mistakes that damage your credit report

Having a good credit report can get you better rates

When it comes to applying for new credit, bear in mind that the advertised interest rates are not offered to everyone. 

The interest rate you see in best buy tables on comparison websites or in adverts is called the representative APR and it only has to be offered to just over half (51%) of people applying and being accepted for the product.

If you are deemed to be a higher risk borrower, that is, less likely than others to meet repayments, then you could be rejected or perhaps accepted but charged a higher rate.

In the case of interest-free deals on credit card debts using a balance transfer card, some providers are very strict about who they will approve for such deals and you might not qualify.

Find out what else could affect your application for a mortgage

Improve your score

Lenders like reliable, responsible customers.  Some prefer candidates for loans to own their own home (although this is not essential) and/or to have lived at the same address for at least a year. Being on the Electoral Register will help too.

Quite simply, just make sure you repay all credit agreements on time.

If you have never had a credit card or any form of debt, this may not be as helpful with an application as you might think.

Lenders usually feel more comfortable dealing with people who have a track record of paying off loans.

You may want to consider taking out a credit card, spending some money on it and paying it off each month to illustrate that you can do this sensibly to build up a decent credit score. 

You should always consider whether you can afford to repay any credit you apply for and never take out more than you can afford.

Read more about improving your credit report

How to check your credit report

Checking credit files has become increasingly important for anyone planning to apply for credit because lenders typically will not divulge the detailed reasons behind any rejection.

You can check your credit report by paying £2 to one of the agencies - Experian, Equifax and Callcredit. There is a chance that your information varies between the three agencies, so it is worth contacting each one.

For a monthly fee, you can sign up to Experian CreditExpert, to have unlimited access to your credit report and receive alerts when there are certain changes to your credit information*.

Experian Credit Expert Get a free 30-day trial with Experian Credit Expert with this special offer.

*A monthly fee of £14.99 applies after your 30-day trial – you can cancel at any time during your trial with no charge. New customers only.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.